Question

With regads to how you use business cycle models, and how the Real Business-Cycle holds up...

a) Explain, in words, the three stages to the modeling process in the Real Business-Cycle.

b) What stage of the modeling process is the impulse response function is

used in? What purpose does it serve here?

Answer 1

This is my answer

Only a part

a)

The modeling process in the Real Business-Cycle is the class of new classical theory in macro economics. The real business cycle theory is periodic ups and down movement in the economy which are measured by real GDP and other macroeconomic variables. There are sequential phases of business cycle that shows rapid growth, stagnation and decline and these phases in the real business cycle accounted for impulse response function in the economy.

These serve the purpose of all cyclical phases with response to technological shocks and also considers changes in the business cycle due to change in the exogenous variable which brings forth ultimate change in economic development.